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IRS Reform a Victory for Taxpayers

On July 22 President Clinton signed into law the Internal
Revenue Service Restructuring and Reform Act of 1998, the most
significant reform of the IRS to be passed in more than four decades.

The new law gives the IRS, the government's second largest
bureaucracy, a not-so-gentle shove toward modernity. The act's major
provisions, approximately 40% of which were based on proposals
presented by AICPA representatives during seven congressional and tax
commission hearings, include expansion of taxpayer protections, IRS
organizational reforms and a number of technical corrections to the
1997 tax act.

"We've put into effect a new structure that is fairly radical
and that should result in far better service and a better culture at
the IRS over time," said Congressman Rob Portman (R-Ohio).
"This is pretty big stuff. It's risky in a way, but, given the
poor results at the IRS on a number of levels, extraordinary measures
were called for."

The most extraordinary measure is the creation of the IRS Oversight
Board, whose nine members will oversee the IRS in all aspects of tax
policy administration.

Six board members will come from the private sector with expertise
in areas such as management, taxation and information technology. The
three remaining positions will be filled by the IRS commissioner, a
representative of the Treasury and a federal employee representative.
All board members will be appointed by the president for five-year
terms on a staggered basis.

"The board will give the IRS outside expertise, continuity and
accountability," Portman said.

Pamela J. Pecarich, who is a tax consultant from Bakersfield,
California, and a member of the tax executive committee, said, "A
lot of changes were necessary at the IRS. With these reforms, Congress
is giving the IRS the time and the tools it needs to improve. The act
buys the IRS a new lease on life."

Under the 1998 act the national taxpayer advocate and the inspector
general for tax administration will gain greater autonomy from the
IRS. The IRS will devise a new mission statement focused on meeting
taxpayer needs. And the IRS will change from an organizational
structure based on geographical units to one segmented by taxpayer
characteristics.

Michael E. Mares, chairman of the Institute's tax executive
committee, said, "When you combine the board's oversight duty
with the enhanced national taxpayer advocate position and the improved
position of treasury inspector general for tax administration, you've
got a lot of oversight that will be brought to bear on the IRS."

In addition to the reforms at the IRS, the 1998 act also mandates
many taxpayer protections.

It extends to taxpayers confidentiality protection for tax advice
given by CPAs and federally authorized tax practitioners (enrolled
agents and enrolled actuaries) in matters before the IRS or in cases
before the federal court in which a federal tax authority is involved.
The privilege extension, however, does not apply to criminal
proceedings.

"The extension of privilege is a good idea for the
taxpayer," said Don Summa, a tax consultant in Red Bank, New
Jersey, and former national senior tax partner for Arthur Young &
Co. "Taxpayers should be able to choose advisers they think can
best represent them."

Nancy K. Hyde, a partner of Onstott, Craddick & Hyde in Oklahoma
City, agreed that the new privilege would benefit taxpayers. "The
accountant-client privilege gives taxpayers the same level of
protection they have now with their attorneys with respect to tax
advice."

Hyde, who is chairwoman of the Institute's tax forms committee, also
said in the past attorneys had used privilege as a selling point in
marketing their tax services. The extension of privilege to
confidential communications with CPAs will level the playing field
between CPAs and attorneys, she said.

Like many other CPAs, Hyde has adopted a wait-and-see attitude on
the provision in the 1998 act that shifts the burden of proof from
taxpayers to the IRS. "That provision is like a beautifully
wrapped present," she said. "When you open it up, it's not
quite as neat as you thought it would be."

The shift would require better recordkeeping and supporting
documentation for taxpayer filings being examined by the IRS. The
shift might also prompt agents to be more aggressive in preparing
their cases, she said.

According to Mares the tax committee opposed the burden of proof
"because we believed it would lead to more intrusiveness into
taxpayer affairs. The IRS would be forced to ask a lot of questions at
the audit level in order to present their case."

Ray A. Knight, a senior manager at KPMG Peat Marwick, said he
thought the provision was so narrowly written that it would have
little effect on the average taxpayer.

"The major obstacle preventing the shift in the burden of proof
from the taxpayer to the IRS is substantiation," Knight said.
"Taxpayers who think the shift is automatic may be disappointed
if their recordkeeping is inadequate."

Knight added that, if taxpayers lose tax cases because their filings
had poor supporting documentation, they may blame their tax advisers
and look to them to cover any losses.

Less controversial and more taxpayer-friendly provisions of the 1998
act include the following:

The IRS will be required to notify taxpayers when it intends
to contact third parties in audit proceedings.

Taxpayers will no longer be charged a higher interest rate on
underpayments than the IRS pays on overpayments.

The netting of interest in overlapping periods of overpayment and
underpayment will be permitted.

The IRS will be required to give taxpayers an explanation of
refund denials.

The statute of limitations on refund claims will be suspended for
taxpayers unable to handle their affairs because of a medical
disability or mental impairment.

Relief for innocent spouses will be easier to obtain.

"The new law is a big win for taxpayers," said Gerald
Padwe, vice-president of the AICPA federal taxation division. The
Institute was very active at every step of the process of bringing
this legislation to fruition. Throughout, the Institute advocated an
improved management structure for the IRS, better service to
taxpayers, stability and simplification of the tax law and
strengthened taxpayer rights.

"By and large the AICPA is very pleased with the act. We're
optimistic about how the IRS is going to look in the future,"
Mares said.

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.